Monday, March 17, 2008

Wearin' of the Green

Hoping to avoid a systemic meltdown in financial markets, the U.S. Federal Reserve has approved a $30 billion credit line to engineer the takeover of Bear Stearns and announced an open-ended lending program for the biggest investment firms on Wall Street.

In a third move aimed at helping banks and thrifts, the Fed on Sunday also lowered the rate for borrowing from its so-called discount window by a quarter of a percentage point, to 3.25 percent.

On Tuesday, the Fed meets to discuss the level of its main interest rate. Investors expect the Fed to cut the target for the federal funds rate by a full percentage point to 2 percent.

Even before any action Tuesday, moves over the past week amounted to a sweeping and apparently unprecedented attempt by the Federal Reserve to rescue the U.S. financial markets from what officials feared could be a chain reaction of defaults.

....The Fed, working closely with bank regulators and the U.S. Treasury Department, raced to complete the deal Sunday night to prevent investors from panicking Monday about the ability of Bear Stearns to make good on billions of dollars in trading commitments.

In a potentially even bigger move, the Federal Reserve also announced its biggest commitment yet to lend money to struggling investment banks. The central bank said its new lending program would make money available to the 20 large investment banks that serve as "primary dealers" and trade Treasury securities directly with the Fed.

Much like a $200 billion loan program the Fed announced last week, this program will essentially allow the government to hold as collateral a wide variety of investments that include hard-to-sell securities backed by mortgages. But Fed officials told reporters Sunday night that the new program would have no limit on the amount of money that could be borrowed.